With the enactment of the U.S. federal Tax Cuts and Jobs Act of 2017 (“Tax Act”) estate and gift transfers became more attractive in the planning of trusts (Pub. L 115-97). The unified credit exemption accorded under the Act, offers a global elimination of transfer tax on a set level of asset holdings gifted or transferred by an individual decedent. The rule change, however, reduces the availability of federal estate tax exemption for gifts and transfers not eligible under the Act. Generation-skipping tax exemption per decedent remains separate from the unified credit exemption from gift and estate taxes.
New IRS Tax Exemption Rules
As of January 1, 2018, the IRS raised tax exemption for gift and estate transfer amounts to 11,180,000 for single individuals, and $22,360,000 for married couples. This is an increase from 2017 levels from $5,490,000 for single individuals, and $10,980,000 for married couples. Modifications of the law before January 1, 2026 are possible, and estate planners are advised to take advantage of the latest exemptions as part of trust planning strategies in advance.
Generation-skipping transfer (GST) tax exemption levels have been inflation-adjusted to $11.18 million per individual filer, and $22.36 million for married couples in 2018. The Act has effectively doubled asset transfer amounts for U.S. citizens and permanent residents.
Estate and Gift Taxation
Federal estate tax imposed on estate assets transferred on death is 40% at present. There is an unlimited deduction for transfers to a surviving spouse, and transfer to eligible charitable organizations. The IRS gift tax of (also 40%) applies to transfer of assets to trusts and beneficiaries while a decedent is still living. Transfers exempt from gift tax:
- Distributions of $15,000 or less during a single calendar year
- Spousal gifts
- Generation-Skipping Transfer Tax
- Tuition or medical expense payments on behalf of a beneficiary
- Some gifts to political organizations
- Charitable contributions
The GST tax is also 40% and applies to outright gifts and transfers in trust to family members more than one generation younger than the decedent; or unrelated beneficiaries more than 37.5 years younger than the decedent.
Formula Bequests an Option
A form of testamentary document directive, “formula clauses” stipulate the division of assets between a “credit shelter trust” and “marital trust.” Formula clauses serve to postpone federal estate tax payment on those marital assets until the death of the second spouse. The Act of 2017 effectively increased exemption levels allowed by way of a formula clause. Estate holders can fund a credit shelter trust up to the full allowable federal exemption of $11.18 million.
Estate taxpayers should review existing formula clauses present in their existing estate plan for consistency with the allowable federal exemption amounts since enactment of the most recent legislation. Formula bequests are generally written to shift tax liability. For example, a marital trust may include no bequest for a surviving spouse, leaving the exempt amount to other named beneficiaries. Disclaimers are often used by an estate on behalf of a surviving spouse to affirm no assignment of assets to a marital trust.
Contact an Estate Law Attorney
A licensed attorney experienced in matters of estate law can advise a client of the best planning strategy for asset exemption from IRS taxation. Ettinger Law Firm is a licensed attorney practice offering estate planning and probate litigation services to clients in New York. Contact Ettinger Law Firm for consultation about an estate or trust taxation matter.
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